Futures markets are electronic trading platforms where buyers and sellers trade contracts based on the ability to take delivery of a certain amount of gold at a certain price on a certain day in the future.
Although they technically involve the final delivery of large quantities of physical gold, the vast majority of transactions in futures markets are conducted as short-term speculation, and very few traders receive (or want to receive) physical gold because the contracts are bought and sold well in advance of the delivery date.
What is a Gold futures contract
A gold futures contract is a legally binding agreement to buy or sell a commodity asset between two parties. Gold is the most commonly traded precious metal.
All trading in Gold futures depends on the spot price of gold on the delivery date of the contract. The buyer agrees to buy a certain amount of gold at a fixed price on a certain settlement date, which is usually the last day of the contract month, and agrees to take delivery of the metal if the contract is fulfilled.
Contracts are negotiated through certified independent clearing houses, which act as brokers. If you want to get into this business, you will first need to open an account with one of these brokers.
Gold Futures Prices: Who Trades in Futures
Traders in this market usually engage in either hedging or speculation on Gold futures prices.
Hedgers buy or sell contracts on the futures market to manage price risks. In doing so, they protect themselves from price fluctuations by securing the future price of a commodity asset. Most often hedging is done by large banks.
Speculators do not seek to minimize risk and use gold futures charts. In fact, they willingly accept the risk and try to profit from expected price movements.
Advantages of gold futures now
Because you only have to pay a small amount of margin to trade futures, you will have financial leverage and you will only pay a fraction of the actual contract value up front. Since many buyers and sellers do not intend to hold their contracts until settlement day, you have plenty of time to lock in profits or cut losses.
Gold futures trading also offers flexibility, as you can easily consider both long positions (making profits when metal prices are rising, as in owning physical metals) and short positions (where you make money when prices are falling, which is much easier to arrange with paper contracts than with real metals).
Because of the huge number of transactions, what is called “liquidity” in the markets is formed: you can quickly stop a good or bad deal by buying or selling an equivalent contract, the opposite of your original investment.
But most investors find it more advantageous to consider physical gold as the core elements of a portfolio, buying and holding them over an extended period because they reduce overall portfolio volatility, rather than increasing it.